For an auto insurance company, investment income is defined as the amount of money earned from insurance premiums and any other investments after deducting the payouts from claims and benefits. The investment income ratio is not the same as a net profit because it doesn't include the operating expenses of the insurance business. If an insurance company accounts for its operating expenses, the income becomes known as net investment income.
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UPDATED: Oct 30, 2020
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For an insurance company their investment income is the amount of money earned from premiums and any other investments they hold after the deduction of claims and benefits paid out to their policy holders.
Investment income is thus a representation of the profitability of an insurance company, the higher the level of investment income the higher the profitability of the insurer.
Is investment income the same as profit for an insurance company?
Yes and no, a snapshot at any one instance of a company’s investment income can be considered to represent the profitability of an insurer. But because insurance companies carry a level of risk exposure this measure is capable of experiencing extreme and even seasonal variations depending on the types of risk that an insurance company is issuing policies against.
The other reason that it is not the same as the profit for an insurance company is that it does not take into account the operating expenses of the business. So items such as building rental (in terms of fees paid to a landlord), heating, lighting, wage bill, IT infrastructure, etc. are not covered in the calculation.
It is possible for two insurance companies to report the same level of investment income but to have wildly different levels of profit resulting from this income. This is because each company will have a different level of overhead, and this will be reflected in their profitability.
Investment income cannot be used in isolation to assess the financial health of an insurer, it needs to be take into account with other financial metrics to give a reasonable understanding of the insurer’s financial circumstances.
A large insurer that is not managing its exposure to risk as well as a smaller insurer may still report a larger level of investment income based on the overall size of its business but may not be as financially stable as the smaller company.
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What is net investment income?
Net investment income is the amount of income left from the investment income after the operating expenses have been deducted. This information is often reported as net investment income per share which is taken by dividing the total amount of net investment income by the number of outstanding shares in the insurance company itself. This figure represents the amount of money available to shareholders in the form of share dividend payments.
Additional Investment Income Explanations