Combined Insurance Financial Management Review
Baker College Online
The Financial Environment/BUS640
September 10, 2013
A company’s success is based upon the creation and implementation of a financial management plan, which allows it to take a certain measure of risk. It also protects the company from exceeding specific limits. The goal of this paper is to demonstrate how Combined Insurance Company, as well as similar businesses, can and does utilize several of the basic financial management principles in developing a successful plan. The final review will show how this company can expand on the basic principles and relate them to particular situations within the organization.
Introduction: Combined Insurance Company
Combined Insurance Company was founded in 1922 by W. Clement Stone with $100 and a rented storefront. Over the years, it has morphed into a leading provider of supplemental insurance products globally, employing thousands of agents and paying out millions of dollars in claims on an annual basis. Currently, Combined has a presence in eleven countries, including the United States, Australia, Canada, and Great Britain.
In 2008, Combined was sold to the ACE Group of Companies out of Chicago. ACE has been responsible for taking Combined into new directions, expanding the sale force exponentially, putting more “feet on the street” and introducing the company to millions of new customers, in addition to revamping the policies offered, increasing benefits, and providing current technology to assist agents in their work.
The financial strength of Combined has grown as well with the acquisition by ACE. Profits and net gains have risen, claims payouts have increased, and the number of satisfied customers continues to grow. Combined is certainly a financially astute organization and capitalizes on their knowledge of the industry and current trends in the insurance business.
Risk Return Trade-Off
One of the primary principles of financial management is to weigh risk against returns. Risking more than what is going to be returned violates that principle and can put a company into financial jeopardy. The capital market theory of financial management dictates that increased returns should be garnered with less risk (Grayson). Investors will not take any additional risk unless they can expect to be compensated with additional return ("Basic principles of,").
Every insurance company is in the business of taking risks and balancing that risk with a reasonable return on investment. Offering insurance to a person with a history of diabetes, cancer, or heart attack is a risk that some insurance companies may choose to forego simply because the risk vs. return ratio is unbalanced. However, insuring someone young, healthy, and with no family or personal history of major illness is a great investment for an insurance company to make as the return on the investment is going to be balanced in favor of the company, not the individual.
Combined Insurance offers policies that are rated for smoking. The premiums on these policies are higher, because smoking is a high-risk activity. The odds of someone dying from smoking related illness are much greater as compared to someone who has never smoked at all. While the company is taking on a higher risk in insuring a smoker against cancer or heart disease, the increased cost of the premiums balances out that risk and the company has a margin of return that they can collect on.
Another type of insurance where risk is calculated closely is life insurance. Here, a person’s occupation may have a negative impact on their ability to obtain life insurance, and certain professions are automatically deemed uninsurable due to the level of risk involved. Many insurance companies require applicants to undergo qualifying