General AccountWhere do your insurance premiums go?

Insurance policies aren’t free.

If you want to get yourself an insurance policy, you’d have to pay for it.

We typically refer to these payments as premiums.

How much premium you’ll be paying will depend on a lot of factors such as the policy itself, the insurance company, etc.

For example, the provider of a car insurance policy will consider the following factors in determining the premium amount: your car, your driving habits, demographic factors, and the coverages, limits, and deductibles that you choose.

But where do these premium payments go?

What does the insurance company do with them?

Does it use them for day-to-day expenses?

Or does it invest them in certain assets to make them grow?

Or does it let these premium payments just sit in their reserves until such time that they need to pay a valid insurance claim?

We will try to address the above questions as we go along with the article.

The General Account

Let’s address the first question: where do insurance premiums go?

The answer to this question would be the general account.

A general account is where an insurer/insurance company deposits the premiums from the policies that it underwrites.

As the term “general” implies, the funds in a general account are not tied to any specific policy.

This means that the general account does not dedicate collateral to a specific policy. Rather, it treats the fund as premiums in aggregate.

The insurer can then use the funds in a general account for various purposes.

Usually, it will set aside a portion of the funds as a loss reserve or contingency reserve.

This reserve will be used to meet unexpected and uncertain claims, as well as to cover any expected losses.

For example, if the funds in a separate account for a specific policy are not enough to pay for a claim, then the insurer will settle the excess amount with funds from the general account.

Another use of the general account is to finance day-to-day operations.

This means that the insurer can use it to pay for operating expenses such as salaries and wages, as well as other business expenses.

However, just using the general account to pay for expenses, losses, and excess claims will only drain it.

If no new premium payments go in, the general account will eventually be exhausted to zero.

That’s why a portion of the general account must be invested in assets that can earn the insurer profits.

This also helps the funds to grow.

Typically, insurers invest in assets that provide a fixed income such as debt securities or real estate.

The reasoning behind this is that insurers need to guarantee that they always have the funds to pay for insurance claims.

General Account Investing Strategy

In regards to investing the funds in a general account, insurers/insurance companies typically employ one of the two methodologies below:

• Managing the funds in-house or internally. This usually requires the creation of a separate department that will take care of any investing activities. This department is responsible for assessing the risks, returns, dividends, etc. that are related to any investments funded by the general account.
• Outsource the investing function to a third party. An insurer may choose to employ the services of a third party (e.g. fund managers) to do the investing function. This takes away the hassle of creating a new section. In exchange, the insurer will have to pay the third party a fee for their services.

The more popular of the two methods above is the latter one (outsourcing the investing function).

This is because of the increasing competition in the insurance industry.

Insurers/insurance companies feel that they need to focus their attention on their main functions/activities.

As such, they resort to outsourcing the non-core functions (such as fund management) to a third party.

Doing so allows them to better cater to their policyholders.

Since insurers need to guarantee that they will have the available funds to cover any arising liabilities or claims, they tend to have a relatively low appetite for risk.

As a result, they tend to invest in low-risk investments such as debt or fixed income securities rather than in the stocks of other companies.

While investing in stocks has the potential to rake in a big amount of money, the risks that come with can be too much for insurers/insurance companies.

A fixed income investment will ensure that there will always be an inflow of money (albeit relatively lower) to the general account.

General Account vs Separate Account

An insurer may choose to create separate accounts that are tied to specific policies or liabilities.

This means setting aside assets that will fund the separate accounts.

The assets in these separate accounts will then cover any risks relating to the specific policies that they cover.

If the assets in the separate account are insufficient to cover a claim, the insurer will cover the excess amount with its general account.

Separate accounts are usually opened through a financial advisor or brokerage.

However, some insurers/insurance companies offer them too.

The main difference between the two is that the general account is not tied to any specific policy or liability, whereas a separate account is.

This means that funds in a general account be used for various purposes such as funding the loss reserves, paying for operating expenses, etc.

On the other hand, the insurer can only use the funds in a separate account for a specific purpose.