Cost, Uncertainties and Profit in Commercial and Social Insurances
Ahmed Mehedi Nizam, 2021. "Cost, uncertainties and profit in commercial and social insurances," SN Business & Economics, Springer, vol. 1(7), pages 1-28, July
34 Pages Posted: 13 Jul 2021
Date Written: June 29, 2021
Here, we argue that the commercial for-profit insurance companies act more like a memory-less system in a way that the premiums paid by the policy holders during one accounting period will be of no avail to them during subsequent periods although the excess premiums earned in the previous periods may rest in the companies' retained earnings. Moreover, commercial insurances are subject to many over-head costs, taxations and uncertainties which are not present in the realm of social insurances. As the costs and uncertainties are greatly reduced and the profits earned in the previous periods are available to meet present and future expenditures, social insurances entail a lower amount of premium for the policy holders than its conventional commercial counterpart. The objective of this study is to quantify the extent of profit made by the commercial insurance companies born out of the premium after meeting up operating expenditures and claim settlements and how this profit evolves over time after being invested at the risk free rate. To us, this is the amount of money that would otherwise rest in a trust fund available for future claim settlement if there were equivalent social insurance schemes in place. To do so, we collect annual country level data of premium collection, claim settlement and operating expenditure incurred for 04 (four) OECD countries from OECD insurance database and extrapolate the profit trends into the future using appropriate ARIMA/ARIMA-GARCH framework. As anticipated, the profit shows an explicit upward trend after making a V-shaped recovery right after the global financial crisis of 2008.
Keywords: Social insurance, Commercial insurance, Comparative analysis, ARIMA-GARCH modeling
JEL Classification: G22, I13
Suggested Citation: Suggested Citation