The actual profit of an insurance company mainly comes from premium income plus the difference between future actual investment income and actual cost expenditure. Specifically, it can be divided into three spreads, namely, spread, handling fee difference, unexpected difference (called death difference in life insurance industry), and a surrender premium difference, which is not a profit model, but also one of the sources of profit.
1) spread: that is, the difference between the interest of the policy value actually paid by the insurance company to the insured and the actual investment income of the insurance company during the insurance period. This income is similar to the deposit-loan spread of banks, but it is very different. The main reason is that insurance contracts are often long-term contracts for decades or even life, and the interest rate paid to the insured is fixed and floating. At the same time, the return on investment is fluctuating and uncertain. For the banking industry, under normal circumstances, no matter how the interest rate fluctuates, the spread will generally be positive. For insurance companies, there may be spread loss every year, especially for fixed-rate policies with high guaranteed interest rates, which will cause long-term spread loss and become loss-making policies. Therefore, when measuring the spread income of insurance companies, we should consider the long-term policy interest cost and long-term investment yield during the insurance liability period. Just like the life insurance industry in China in 1990s, when the one-year deposit interest rate of the central bank dropped from 10.98% in July, 1993 to 2.25% in 1999, life insurance companies underwritten a large number of policies with a predetermined interest rate exceeding 6%. 1When the long-term deposit interest rate was above 8% before 1997, the return on investment of insurance companies exceeded 10%. However, with the downward adjustment of interest rates, the return on investment of insurance companies has fallen sharply, and the interest rate paid to policyholders is still the predetermined interest rate of more than 6%. Looking back, these policies have become loss policies with long-term spread losses. The root of the problem lies in the fact that China Life Insurance Company, which is in its initial stage, lacks reasonable judgment on the long-term return on investment in the era of high interest rates, and has made a policy commitment to bear interest rates above 6% for decades. With 1999, the China Insurance Regulatory Commission issued the highest scheduled interest rate of 2.5%, and the new policy after 1999 basically eliminated the spread loss. However, with the intensification of competition among insurance companies, especially in the future era of high interest rates, if the regulatory authorities relax or substantially increase the maximum predetermined interest rate, some insurance companies may still have a large number of loss policies with spread losses out of the pursuit of short-term interests. This consequence is very serious. If it appears in the growth period of the insurance industry, it will directly lead to the bankruptcy of insurance companies.
2) Expense difference: that is, the difference between the pricing expense rate estimated by the insurance company at the time of policy pricing and the actual expense rate in the company's operation on this basis.
3) Unexpected difference (death difference): For life insurance, it is mainly reflected in the difference between the expected mortality rate, the incidence of accidents and major diseases, and the pricing expense rate that reserves a certain profit on this basis, as well as the compensation expenses generated by the actual mortality rate, accidents and major diseases in the future. For property insurance companies, it is mainly reflected in the difference between the pricing based on the estimated accident rate and the actual compensation in the future. This risk of property insurance companies is relatively high. Future disasters, especially natural disasters, have great uncertainty, the occurrence period is uncertain, and the insurance liability period is not as long as several decades as the life insurance industry, so the prediction based on historical experience will be very different from the actual occurrence rate of the insurance liability period of the actual company.
4) Refund of premium difference: For life insurance companies, the insured generally has the right to surrender, and the insurance company will refund the fee to the insured according to the cash value of the policy. However, for the insured, surrender is not cost-effective, especially in the years before payment, because the premium insurance company in the early stage accounts for a higher proportion of expenses, and the surrender amount is generally lower than the reserved value of the policy, so the insurance company no longer bears risks. For insurance companies, surrender itself is profitable. Of course, no insurance company is willing to earn this part of profits, but surrender exists objectively and always occupies a certain proportion, so it is also the source of profits for life insurance companies.