Sample Research Paper on Role of Finance in the Insurance Companies

Introduction

The function of finance is a key requirement for the performance of any insurance company.  Finance fuction can be determined as the main driver of the insurance company since it is related to finance product and product marketing. The absence of finance in an insurance company can cripple the functional unit of the insurance company operations. Availability of finances will  enable the commencement of an insurance company, sustainability, and expansion of the company.

The main role of finance for an insurance company is to support and sustain the financial need of the company and to ensure an effective control of the company environment. Finance can be termed as the nerve center of the insurance company since it necessary forpromoting the company, acquire assets, develop insurance services, and running market surveys and company product advertisements. The predictable view of the role of  finance depend on its ability to be efficient, risk averse, and quantitative. Insurance companies are vision oriented, focused on growth, risk takers and seek for opportunities(Jespersen, 2011).

Corporate finance is the principal instrument for allocating company resources, offering equitable financial opportunities, creation of economic forecast and also in performing various function of the insurance company. Insurance companies are involved in various risky ventures that may see the company ran into debts and losses. Therefore, it is necessary the insurance company to require external advice concerning financial decision makings. Insurance company always apply mathematical and statistical formulas in calculating financial outcome that are necessary for the insurance company operations. The finance formula that is used to provide information to the business may be outsourced, or the company may decide to apply internal formulas to get the financial status of the company.

There are various types of finances that are necessary for the insurance company that must be adopted. The insurance company has to be aware of the present value of the company, the returns on investment,and payback period for its clients. The primary function of finance is to provide the investors with accurate information that are relating to the company return on investment for various services that are being offered by the insurance company(Getti, 2013). Finance will assist the insurance company in comparing the cost of company decisions and the profits that can be realized from the decision. Insurance companies that may decide to seta high percentage of minimum returns will allow the company to put in more funds that will see the company achieve adequate profits at the end of thecontract. This particular essay will mainly discuss the role of finance in the insurance company. The primaryfunctions are as follows;

Managing the insurance entities

Managing an insurance company is such a challenging task that requires financial and accounting information that can be used in planning and making decisions for the insurance company. The insurance company will require the financial information for budget preparation for the insurance company and the company will use the financial information to equate the budget and the business operations. In addition, the insurance company management is always interested in service cost of the companythat can be used as a platform for decision-making.

The finance department is reliable for monitoring managing financial activities for an insurance company since money if the backbone that sustain the insurance company. The main objective of the finance section is to know how the insurance company can maximize the company profitability and have more saving(Paolucci, 2011). The financial department must liaise with another department in choosing the correct plans that will help in cost reduction while maximizing on activity outputs.

The insurance company has to budget with the available finance to manage all the existing company branches by setting up a financial strategy that will meet all the cost. The financial strategies have to be followed with regards to what is stated in the insurance company operation statement and objectives.

Finance play a significant role in conceiving the ideas for the insurance company on whether to expand the business or maximize the service delivery for the already established branches(Jespersen, 2011,). Finance is also important inpromoting the insurance company entities, acquisition of fixed assets and carrying out market surveys for the company. An effective and efficient management of the company entities, finance play a role in encouraging the management team to make progress and add value to whatever role they play in the insurance company so that the business can expand and acquire more customers.

Present and potential investors

Investors are always interested in knowing the financial information of an insurance company in order to carry out an assessment of the risk that are related to investing and the returns that they will gain from the insurance company. The financial information of the insurance company will assist the investor in making decisions on whether to increase or reduce the investments in the insurance company.

Potential investor and shareholder in the insurance company will carry out risk credentials and provision depending on the financial status of the insurance company(Canti and Hamaui, 1993). Before investing in an insurance company, the investor will fort determine all the risk that are related to the institutionand the possibility of  breaking down the risk before planting money in the company. Insurance companies can only allocate risk to the investor, customers or the taxpayer since the risks that are being realized in insurance companies can only be distributed among the parties. The level of risk will enable the present and potential investors to make appropriate decisions on where to put their finances. With a good financial background, investor will not hesitate to provide more finance to the insurance company since they will entrust the company success.

Potential investor will only come to the terms of agreements if the financial liability of the insurance company is stable and the total revenue covered in the company operation are predictable and clear to the management. An investor will not agree to finance a project that will not comply to the government taxation plans hence leading to the collapse of the project and pay  again to revive the project (Megginson & Smart, 445). The investors will look keenly at the demanded risk for the insurance company and determine if the rewards or returns from the operations are timely and to the level of investment. Governance of the insurance company is also important for the investors. The governingteam should have skillful personals that are responsible and proficient in managing the finances of the insurance company.

Job security for employees

The insurance company is a lucrative business that the people employed to work in the company should know the stability and the profitability of the insurance company they are working. The employees can use the financial information to monitor the trend of the business and later apply the findings in making decision whether to continue working for a business or seek for an alternative job (Jespersen, 2011).The insurance company is supposed to provide renumerations, job creation and retirement benefits for the employees.

The people employed to work in the insurance company will feel safe when they are working for a company that they know will enable them secure a good financial future. The insurance company should find an appropriate way of maintaining a corporate trend that will offer the employees the required resources, working tools and capacity building that is necessary for the staff to deliver more on their areas of operation. The necessary demands for the employees can only be met if the insurance company has enough finances to cater for the expenses(Paolucci, 2011). The employees have to be assured of their salaries and wages without the company making unnecessary deductions.

A well-financed insurance company will be in a position to provide the employees with sufficient financial benefit that will enable them to save some money for their retirements. The insurance company should also be in a position of securing sound economic future for the employees by providing them with incentives. With sound financial status for the insurance company, the company can pay the expense of the employees by paying for their capacity building(Paolucci, 2011). The benefits programs will determine the level of commitment by the employees to work that the insurance company can pay for as a way of engaging employee, employees retention, and productivity in the company performance.

Decision making for the insurance company

Fundamental assumption in the operation of every insurance company or any other business is decision making. Decision making is needed to improve the business economy, and it can only be achieved by having adequate financial status of the insurance company. Themuch-needed information can be received from the accounting information system and from the financial statements of the insurance company during the time it has been in operation(Getti, 2013). The financial statement should provide an objective and realistic picture of the insurance company status and the economic trends of the business.

The insurance company will make a decision in consideration of the financial information that can be acquired through the analysis of the financial statement of the company. Financial statement always come before the management process thereby making financial planning be part of the management process. An excellent financial planning for an insurance company should put into consideration all the strengths and weaknesses of the insurance company.

The process of financial statement inquiry is to realize the real features of the insurance company so that the characteristics can be taken as advantageous to the company’s success(Megginson & Smart, 2009). Weaknesses that are realized in the financial statement scrutiny can also be used to carry out corrective action by the insurance company to ensure the sustainability of the business in the economy. It is, thus,significant to note that a successful management of the insurance company requires adequate analysis of the financial statement.

Different approaches can be used while doing the financial statement analysis. For example, the insurance company can take horizontal analysis whereby the company management team will evaluate the trend and the changes in a particular position of a financial statement. The analysis will involve the estimation of business efficiency and the security of the insurance company interms of its operation in the market(Outreville, 2009). By carrying out financial analysis of the insurance company, the management get acquainted with the quality of the insurance company interms of profitability, losses incurred, the profits realised and cash flow of the company in a financial year. With the financial analysis, the insurance company is in a position of assessing the company liquidity ratio and solvency so as to show the current liability, dividend, interest and total liability of the insurance company. The insurance company will also make decisions upon evaluation of the company capital expenditure ratio and the different types of cash flows that will be used to make resolutions on whether to purchase capital assets, investing or financing the company.

 Ascertaining the value of the business

The network of the insurance company can be estimated by looking at the finances that the insurance company is holding. The company value will be determined by looking at the current assets inform if cash, inventory, and receivables, and current liabilities in terms of payables and accruals. Asset management and determination of the company value will also take consideration of total turnovers and the improvement in the management of working capital the cycle of cash conversion. While benchmarking with other insurance companies, it is important for a company to know the rule of asset management to monitor their operations nad performances.

The value of the insurance compony can be determined by financial data acquisition that will include previous financial audits and statements and through the listing of assets and company liabilities. The value of the insurance company can be estimated by discounting the company cash flow analysis(Outreville, 2009). Finance for an insurance company will include both the tangible a the intangible assets such as goodwill and patents that are not present in the market value. The financial position of the insurance company will be determined considering the market capitalization and the equivalent share price and the outstanding shares of the market.

Know the profit and or loss position

Insurance company can measure the operational efficiency of the firm by identifying the profitability ratio. The profit nad loss ration will help the business in indicating the disadvantaged areas of operations and need a corrective action by the management. The accounting department of the insurance company will carry out analysis of the total sales, assets and network the company. The analysis will assist the insurance company in setting profitability ratio for the insurance company to ensure its smooth operation for improving the company values and activities(Jespersen, 2011).

The insurance company nee to know the financial security of the company and look at the efficient use of the company financial resources in generating more funds for future investments. The insurance company should adopt thefree cash flow matrix when they need to project capital expenditures for the insurance company in implementing and continuing the already set projects(Megginson & Smart, 2009).

The insurance company should use the realized fund from the profit to save and also to take part in the financial market. The funds can later be used in carrying out business activities or carrying out profit playback in the insurance company.

Ascertain the assets and liabilities of the insurance company

Accountability is very crucial for nay insurance company as a way of maintaining customers trust in investing resources for the services being offered by the insurer. The insurance company should always consider the dynamics of the monetary time value or the purchasing power of the currency while determining the financial value of the company. In an insurance company, the management has to account for all the type of insurance policies being offered in order to know the main source of finances(Kirsch, 1996). Financial positionof the insurance company can be determinedby personal resources that are available to the business. To determine the financial position, the insurance company accounting department must look at the net worth and cash flow of the customers that include the summation of the customers assets under personal control with an exception of household liabilities. The financial position of an insurance company will enable the financial planner to be in a position to give priorities to the various goals that need to be achieved the insurance company.

Determining the financial position the insurance company, management will know how to protect investor from unanticipated risks. The company will be able to offer protection against liability, loss of property and long term health cares. Some of these risks will require the party to purchase the insurance contract. Hence, the financial planner will choose the cost to be paid by the clients.

Know the cash and wealth of the insurance company

The insurance companies need to evaluate a company’s growth indices by assessing the finances of insurance sale and the market share. Growth index will enable the company to determine the accepted trade of with regards to cash flow reduction and returns on investments. If insurance companies want to grow, the company will experience cash drains hence prompting the business to borrow some funds and engage in aggressive asset management techniques that will ensure the sufficient finances.

The insurance company can use the company financial report in meeting the tax optimization strategies and plans for the company. Every insurance company needs to manage tax liability that is being undertaken while operating the insurance company. The management will also use tax optimization to have an overview on how to mitigate the risks resulting from reduced tax for the clients. The performance of the insurance company can be measured on the tax basis, which is the prime source of income for the insurance company (Paolucci, 2011). Every insurance company has to adapt to various kind of tax optimization depending on the type of environment that the business is being established.

Maintaining leaders trust in the insurance company

Insurance companies have leaders who are responsible for providing capital for the business. The leaders or the shareholders have to be conversantwith the financial status of the insurance compony so that they can monitor the way their invested capital is working. A leader has to know that the loans and the equivalent interest shall be paidon the due dates.

The insurance company can maintain the leaders trust by being consistent and transparent in the financial dealings. The leaders will always focus on the outcome of the insurance company while undermining the processes that yield the result(Canti and Hamaui, 1993). The decision that was made while Getting into a contract is very important in determining the finances of the insurance company and the general performance of the company. Leader should always get their financial bonuses on time to enable then build trust in the insurance company that they take part in promoting.

The insurance company should take charge of the underlying funds by following the portfolios schedule that will help in improving the shareholder’s reports and presentation of the financial statements.

The leaders will require the insurance company to provide various disclosure documents which may be voluminous interest of portfolio schedules. Financial management by the insurance company should be according to the business policies and deviations should be engaged that could see the business fail.

Customer acquisition and retention

Insurance companies need customers in order to continue with their daily operations. It is, therefore, important for the insurance company to acquire more customers and retain then in order for the company to realize aprofit. Financial data of the insurance company is needed by the customers to know the anticipated change in price and to seek identify any other alternative sources of service providers when there is aneed.

The insurance company will need to carry out various advertisement and product promotion for the company. This demand all depends on the finances available in the company that is set for the activity. Customers will not know the existence of an insurance company without the company engaging in intensive product promotion (Jespersen, 2011). Insurance company needs clients for it to successful in achieving the set objectives and meeting the financial targets. The insurance company needs to improve on service provision and come up with excellent insurance products and policies that will see more clients join the company.

Insurance company must set aside fund to compete with prices in the competitive insurance market. In order to retain customers, the insurance must have price competition by benchmarking with other insurance companies on the rates being offered. The insurance company must, therefore, have adequate funds to provide products at discounted rates and give appropriate discount to some specific customers who qualify in the organized company competitions (Getti, 2013). The insurance company may go to the extent of making losses just to retain the customers because if the insurance lose all the customers, the company may go to a complete loss.

As a way of keeping the customers, the insurance company may decide to raise barriers to quitting the insurance contract by penalizing the clients who wish to quit the company before the due date of renewal. The insurance company will also try and sell multiple insurance policies to the clients in order to get more funds. Hence, it will be difficult for the customerto change quickly to another insurance company. Insurance companies can devolve funds in doing marketing new policies for the current customers, which will be more cost effective compared to doing advertising for new customers to join the company (Fitch, 2007). The strategy will be successful in retaining the customers since it will influence the renewal dates for the financial policy and becoming cumbersome for the customers to leave to join other insurance companies.

Compliance with government policies

The government is the ones responsible for providing operation permits for the insurance companies. Therefore, the government has a part to play in the functioning of the insurance companies, and they need to have access to the financial status of the insurance company so as to regulate the company activities.

The national government will always monitor tax remittance by the insurance company hence the company will always require funds to carry out its operations. Insurance company should not fail to comply with the state regulation because such failures will result in huge penalties that may make the insurance company run at a loss. Funds that are available in the insurance company should be adequate to meet the taxes that are required by the government (Kirsch, 1996). The finance department should be able to carry out tax accounting, remittance and file return to ensure the insurance company complieswith the legal policies.

 Maximizing shareholders value

The finance department of an insurance company is entitled to the responsibility of figuring out on how to allocate assets to the dynamics goals of make the most of shareholder’s standards. The finance department will always ensure that everything, inform of assets are rightfully positioned. Finance will also manage the liability of the insurance company by ensuring that the available balance can finance the company projects optimally without engaging in too many risks (Megginson & Smart, 2009). Corporate finance, which is the branch of finance that is responsible for monetary financial decisions, will always ensure that the insurance company maximizes the value of shareholders. The maximization activity can be donein two faces, Lon term and short term depending on the financial availability. The choice of maximization will also consider the urgent need of the insurance company that is supposed to be met by the finance department.

The insurance company may choose to pay dividends to a selected group of shareholders that are having ownership of the company stock. This will be useful in increasing the company shareholders stock in the short-term basis. Dividend payment to the shareholders does not put the insurance company funds for long-term investments that may result to increasing the financial status of the insurance company. However, it will be increasing the long-term wealth of the company shareholder (Canti and Hamaui, 1993). The main reason for maximizing on the shareholder’s prices is for the management of the company assets since the finance will figure out how well the company should invest the funds. The finance should be in the forefront for in the projection of future cost and revenues for the company and figure out the projects to be given priority.

Through Consideration of the financial status of the insurance company, the finance will be in a position to determine when acorporation should consider taking liability to enhance its operations. If the company projects are still on and the company is running out of funds, the finance can take the option of borrowing money from other financial institutions to complete the projects in place.

Investment decision

The insurance company has to establish investment decisions that will enable the company to know in which projects funds are supposed to be directed. Finance for are insurance company can be considered scarce and limited hence a need for rational use of the available finances. The investment decision for an insurance company will allocate and ration the company resources among the conflicting capital investment and the existing opportunities. The investment decision for an insurance company will relate to the sum of assets held and the composition of the assets inform of current and fixed assets. With the available finances, the insurance company will decide on the type of risk to invest the money, which can be eitherlong-term investment decision or long-term investment decisions.

The long-term investment decision, which is referred to as the capital budgeting decision and is related to fixed assets, can be helpful in assisting the insurance company in putting the finances into right use (Dewing & Russell, 2009). Investing in fixed assets by the company will be helpful in creating long-term financial supply for the insurance company since they create future benefits and earnings for the company. Making proper plan for the investment decision is important for the insurance company to set up new units and to establish new units in thefuture.

While establishing the long-term investment decisions, the finance manager or the finance controller is expected to allocate and evaluate the profitability of the investment proposals for an insurance company before settling on a decision for theestablishment. Short-term investment decisions for the insurance company can be referred to as the working capital. The financial controller has to allocate all the cash equivalents, inventories, and receivables. Taking care of all the insurance company investments and monitoring the performance and profitability of the investments are crucial in finance utilization and management (Kotlikoff, 2010).

Liquidity

A key requirement for the success of the insurance company is the management of the existing assets, which can also be termed as managing the working capital. The long-term survival and the short-term survival for the insurance company have to be managed accordingly by the insurance company’s cash management department (Kotlikoff, 2010). The insurance company will enjoy greater liquidity by putting more finances in the current assets. The benefit of current assets is to enable the insurance company pay for the debts owed to other stakeholders hence ensuring the survival of the company. With the insurance company owning many fixed assets, the insurance company will experience excess liquidity hence the company will not strain from debt payment and settling the dividends.

Stable financing will not make the insurance company to face the threats of insolvency for evading payments. With high liquidity rate in the in the insurance companies, the company is expected to receive high cost of profitability which would otherwise suffer from more idle finances. With the company engaging, more finances in current asset investments, there a likelihood of liquidity and profitability, getting affected and being at high risk. It is, therefore, the role of finance departments to keep track of, and maintaining the profitability of the company and the liquidity ratio that will see the company grow in service delivery(Kiser, 2010). The main role of the finance department is to ensure the financial security of the insurance company by coming up with management strategies that take into consideration the trade of concerning liquidity and profitability. The main threat and a big challenge for the insurance company finance department are the company working capital. The personnel skills are put to test on a daily basis as they work towards maintaining the working capital.

Dividends

The main role of finances in an insurance company is the provision of dividends to the customers(Kiser, 2010). The available finances in the company accounts will enable the finance manager to make appropriate dividend decisions with the consideration of company profits to be disbursed and the amount of finance to be retained. For the insurance companies, the most outstanding point in dividends decision is the payout ratio for the investors. The finance department has to determine the portion that will be paid to the shareholders without affecting the company financial status (Dewing & Russell, 2009). The finance department will also put into consideration the amount of money that will be available for the firm to continue with its day-to-day activity. Making decisions on dividends payment is a challenging activity that will depend on the shareholders to be given priority and investment plan in place. In the insurance company offer, high rates of dividends, that exceeds the market share; there will be an increase in the market price share that will leave a minimal amount of retained earnings for the development.

Conclusions

The size of an insurance company is measured by the financespent debt and deficits. The pay policy of an insurance companywill define the company financial status. Large insurance companies will tend to giveagreater portion of the finances compared to micro smaller insurance companies. Finance is crucial in the companygrowth hence should be rated with care so that the company can meet the tangible and non-tangible assets (Paolucci, 2011). Effective financial management is detrimental in the performance and success of the insurance company. The main areas to consider in financial management should be budgeting, forecasting and dividend payment. Insurance companies are a competitive business venture market hence hey should come together and operate as a team, offering that uniform value of the services.

 References

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