KEY WORD
Insurance application Administrator Broker Mortality profit
Investment profit Sources of profit Medical statement Medical examination
Sales channels Hidden profit sources Network Temporary decline
Commission system Renewal commission Commission regulation Acquisition commission
Calculated profit Solvency Claims handling Area director
Classical branch offices Product development Underwriting Recruiting
Expense profit Surrender/lapse profit Policy Agent
Policy issue Director of sales Policy administration Waiting period
1. It was mentioned previously that a typical life insurance is different from the other insurance
types in two aspects
1. Claims can be calculated with high exactness,
2. The insurance contracts are usually signed for decades, and the premium paid by
the policyholders creates the funds for claims and expenses gradually.
These special features are reflected in the profitability of the newly launched insurance
companies. It is natural, that every company, so as every insurance company, whether its
main products are life or other kinds of insurance, show a deficit in the first years of its
existence.
2. The main reason for that is that the expenses of founding such a company
(buildings, rental fares, salaries, devices, such as personal computers and software) has not
been compensated yet by sufficient premium income.
3. However, compared with property
insurance companies, the life insurance companies have a specific initial source of loss. This
specific source of loss can be connected to the problem mentioned at the topic of
zillmerization, namely that (in the case of insurance with typical, i.e. regular premium
payment) the expenses of the insurance companies resulting from the life insurance
(commission, medical examination, policy administration) incur at the beginning of the term,
while the cover of these expenses from premium loading are arriving in a relatively slow rate.
4. One possible solution to this problem is zillmerization, which means that the insurance
company borrows money from the premium reserve of the client. This sum can be that part
of the risk premium in the first year or years, which is not essential for paying up the possible
death in that year. If the insurance company determines the commission level to such a
degree, that the sum borrowed by zillmerization meets the expenses of signing the insurance
policy, this problem ceases to exist, which means that the newly founded life insurance
company cannot be differentiated from the newly founded property insurance companies in
5. JÓZSEF BANYÁR: LIFE INSURANCE
the terms of initial losses. However, if the fights for the best agents in the business force the
companies to decide on a higher commission rate, then this results in the above mentioned
additional loss factor.
In these cases the insurance companies appropriate larger sums for the signing of an
insurance policy than the premium income of the given policy in the first year. This means
that the better the launching of the insurance company is and the faster it gets new
insurance policies, the higher losses it has in the first few years, or until the new policies
outnumber the old ones that managed to recover their initial losses. This period producing
losses can last up to 5-10 years.
6. This is usually longer than the loss-producing period of the
newly founded property insurance companies, as in the case of (usually one year long)
property insurance policies the initial loss factor caused by the commissions is missing. That
is why life insurance companies are usually founded by firms with high capital investments
that have the time to wait out this 5-10 years period.
In spite of the initial losses it is worth to establish a life insurance company, because the
business itself is much safer compared to property insurance companies, due to the
predictable feature of the claims.
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