What Exactly is an Insurance Premium?
An insurance premium is a calculation made by an insurance company based upon a specific business model or type of insurance that considers the likelihood of claims filed in order to properly price their products for purposes of generating profits. The calculation uses actuarial tables and methods to make assumptions and quantify associated risks. The process consists of underwriting and investment returns.
The underwriting process.
The first and most complicated determination of premium is derived from the underwriting process. This process involves the use of actuarial science that analyzes a wide assortment of data based on the product offered and the risk factors of the insured such as age, health. experience, education or other factors that are specifically related to the type of insurance offered. Insurers must determine the amount of risk that they are willing to assume and the price that they should charge. This computation also must take into account the probability of risks and overall exposures that the insurance company is willing to accommodate. An insured underwriting performance is measured by dividing claims and underwriting expenses by premiums. A ratio of 100% indicates a profit while anything over 100% indicates a loss. However, the inclusion of investment return discussed below will impact these ratios and can turn a loss into a profit. Nevertheless a ratio over 100% requires a good hard look at the underwriting assumptions.
The investment return.
The investment profits are based upon float which represents available reserves of money at hand that have been collected but not paid out as claims. These funds earn interest until they are needed. This represents an important aspect of the insurance premium computation.
Determination of profit for insurance premium computation.
The insurance business model for determining profitability and premium amounts is reduced to a simple formula, as follows: Profitability = collected premium + investment return – claims paid out – underwriting costs.
Final Determination of Insurance Premium.
Underwriting standards need to be constantly reviewed and adjusted. During periods of low interest rates, investment income may not offset losses from the underwriting ratio. Therefore, premiums and the amount of risk exposure that insurance companies are willing to accept may require an increase in premium as well as a reduction in the type of insurance product offered. For example, during the hurricane season in the U.S., many insurance companies lost a lot of money because the insurance premiums were too low.
Guide to Employee Stock Options
Some companies will offer their employees stock options on a contractual basis. Usually, employers will provide these stock options to employees privately, and they comprise a portion of the employee’s contract. Employers choose between vested or non-vested stock options for their employees, and employees have to agree to certain conditions regarding stock options.
Long Term Incentives
Employees can’t immediately sell their stock options, rather, they have to retain ownership of the stock options for a set period of time. Employers will usually require that their employees’ stock options be non-transferable. Normally, stock purchases are transferable, but the company has an incentive in creating investors whose stocks are non-transferable.
If employees perform exceedingly well, some companies will offer extended stock options. Some companies will even offer a variety of different stock options to top employees. The company will generally establish the strike price of the stock before offering employee stock options.
Some Advantages of Employee Stock Options
The established strike price allows employees to exercise stock options once specific pricing occurs. This means that employees of the company have a competitive advantage over some other stockholders. The initial stock offering usually determines the strike price of the stock, although different sized companies will usually offer relatively different strike prices on stocks.
Both large, well-established companies and smaller companies offer stock options to employees. Sometimes, small companies will offer stock options to employees so that they don’t have to pay them such high salaries. More established companies generally offer stock options to their favorite employees. They provide stock options as an incentive to keep these employees working at the company.
Extending Your Investment
Long duration periods distinguish employee stocks from traditional stocks. Some companies have built stipulations so that employees can extend their stocks for up to ten years. Standard stocks expire after thirty months. The majority of employee stock options are taxable, although this depends on how the stock options are structured by the issuing company.
Employee stock ownership differs markedly from employee stock options. Companies that offer stock ownership to employees are basically offering a form of a retirement plan to their employees by giving them stock ownership in the company. These terms mean very different things, but are often confused. As an employee, you should carefully analyze stock options so that you are sure about the deal that you are getting.
Increase Home Value with Open-End Mortgages
Borrowers who want to use mortgage funds to improve their homes can do so through open-end mortgages. Open-end mortgages with mortgage rates give borrowers the ability to borrow additional money through the main mortgage, as long as the borrower fulfills some specific criteria.
Apply For Open-End Mortgages at the Outset
You have to apply for an open-end mortgage when you initially apply for your loan. If you wish to convert to an open-end mortgage in the middle of your contract, you’ll need to refinance.
In traditional mortgages, the principal refers to the amount of money that the borrower takes out to pay for the home. Then, the lender and borrower agree on a repayment plan so that the borrower can pay back the principal with interest.
The Freedom to Access More Principal
However, in open-ended mortgages, borrowers have the ability to take out more principal incrementally. This means that the borrower can effectively increase the principal owed on the home. Borrowers do this usually to improve upon the home.
This works very similarly to home equity loans, except that in this case, the lender issues the additional principal rather than the bank.
Keep A Good Ratio
Borrowers must establish a strong ratio between the principal owed on the home to the value of the home. Lenders will often impose restrictions on open-ended loans based on these criteria.
Many people like open-end loans because it allows them to quickly tap into money and use it to improve upon the home. So, if you want to fix your floors, you can utilize these funds to do so.
Choose open-ended mortgages if you have a strong credit history and you are good at estimating your financial obligation to lenders.
Capitalize On High CD Rates With Bump Up CDs
Nowadays, traditional CD rates aren’t hooking in as many customers. In order to capitalize on appropriate CD rates, most investors are looking for more flexible investment options.
Play the Market with Variable CDs
As a result, many banks and financial institutions are now offering CDs that have fluctuating interest rates and flexible maturity dates. You often have to give up a little bit of yield in order to gain flexibility with your CD. However, many CDs offer benefits that are just too good to pass up.
Bump-up CDs have become all the rage in banking institutions. These CDs give investors crucial freedom regarding interest rates. In fact, if interest rates rise while you own a lower-interest CD, the bump up CD allows you to take advantage of the higher interest rates.
For example, let’s say you have bought a five year bump up CD at 1.34% APY. However, two years into your purchase, the bank is now offering 1.5% APY on five year CDs. If you own a bump-up CD, you can upgrade your CD to the higher interest rate and earn more interest as a result.
According to Dan Edwards of Wells Fargo, “Bump-up CDs increase assets because they’re directly tied to the prevalent interest rate climate.”
Realities of Bump-Up CDs
Keep in mind, some banks will only offer bump-up CDs for shorter term CDs such as two year CDs. The starting yield on bump-up CDs is usually set a bit lower than on traditional CDs, simply because the bank has to assume that interest rates will rise.
When you buy a bump-up CD, you are basically betting that interest rates will rise over the duration of your CD. You are taking a risk here, because if interest rates do not rise, then you’ll be stuck with a low-yield CD.
So, here’s one way to decide whether a bump-up CD will pay off. If you see that the bank is offering a three year CD with a bump up option, and a three year CD without a bump up option but at a quarter percent higher interest rate, then only purchase the bump up CD if you believe rates will rise by more than a quarter of a percent.
Also, the length of time that it takes for interest rates to rise will determine whether your investment pays off. If it takes a long time for interest rates to rise, then it’s likely that the extra time you spend waiting will not have paid off the lower interest that you received during the waiting period.
Know the Rules
You also need to make sure that you know how many times you are permitted to bump up your CD. Many banks will place restrictions on the number of times you can bump up. Some banks may even require that you extend the term of your CD before you bump up.
You should do your own research before buying bump up CDs. Only purchase these CDs if you strongly believe that interest rates will significantly rise during the term of your CD. Otherwise, it is smarter to go with a conservative investment such as a CD.
The Drawbacks in Avoiding Giant Stock Losses
It is possible to avoid Giant Stock losses but as with everything, there are pros and cons.
Examining “what if” scenarios in retrospect can only serve to prevent you falling in the same mistake in the future. Most stock market investors will be asking themselves if there is a way to avoid being crushed in the future by a situation similar to Thursday’s one thousand point flash crash.
The answer is yes, it is possible but each scenario has its drawbacks.
Setting an asset allocation which is reasonable protects you from potential market meltdowns. Your exposure to stocks is the best way to defend yourself from becoming a casualty in a giant stock loss situation.
If, for example you had invested $100,000 in a large core fund company at the end of April, you’d have experienced a 6.6% loss by the end of Thursday, or in other words you would have suffered a loss of $6580. Large company core funds are stocks in companies who have market values in excess of $10 billion. Companies that are growing yet selling at reasonable prices in relation to earnings are coveted by managers.
Investing in money market funds or bonds can also help protect your losses drastically. Diversifying your investments goes a long way in ultimately protecting you. In the previous example, if you had invested 60% into a large company core fund and 40% into government bond fund, your losses would have been reduced to less than half or in other words only 3.2%.
A proven way of determining how much of your portfolio should be invested in stocks is to deduct your age from 100 to get a percentage. This percentage is indicative of how much your retirement portfolio should be invested in stocks. For example a 40 year old person should have 40% of their portfolio in bonds with the remaining 60% invested in stocks.
This does have its drawbacks though and just as a 30 year old person may not need 20% of their assets in bonds, a 70 year old individual may not need 20% of their portfolio in stocks. Nonetheless this process is a good way to start.
The next factor in avoiding giant stock losses is your level of tolerance to sustain short term losses. If you were financially ruined on Thursday this could be an indication that you overinvested in stocks. If you were in the process of buying stocks when the market plunged this would indicate you didn’t invest enough.
Another thing you should consider if you want to avoid giant losses is a stop loss order. Stop loss orders are basically instructs your broker to sell when your stock reaches a certain percentage in loss, for example if you’re training a stock at $100 and you don’t want to lose more than 10%, your stop loss order would instruct your broker to sell if the stock reached $90.
Stop loss orders have a big drawback: As soon as a stop loss order becomes a market order when it reaches its trigger point. It will be sold for whatever it can get on the open market. What this means to you as an investor is that in a chaotic market environment your stock may sell for far less that your stop loss price, e.g. if your stop loss price was $90 your stock may sell at $85 depending on the market.
As stock increases in value, you should set your stop loss order accordingly. ExitPoint.com and SmartStops.net are two online sites that offer valuable resources and advice on how to set your stop loss orders.
Last but not least, a good way to defend yourself from giant stock losses is to avoid investing in inverse ETFs, or stocks that rise when there’s a fall in the market and vice versa.
It is wise to avoid these stocks because not many investors are adept enough to trade in these funds quickly enough in a chaotic market. As long term investments they do very poorly, especially the ones that claim you will get double and triple inverse returns on them. A good example of this would be the Direxion Large Cap Bear which rose to 9.7% on Thursday but was down 59.9% for the past year.
How Motorcycle Insurance Rates are Determined
A variety of factors will strongly influence motorcycle insurance rates. Many riders worry about excessive insurance costs. There are ways to lower motorcycle insurance rates. Here, we’ll look at the major factors that affect motorcycle insurance premiums.
1.Type of Coverage
Almost all motorcyclists are required to purchase liability insurance, which will cover expenses in case they injure someone else. While liability insurance is fairly inexpensive, it’s much smarter to purchase collision or comprehensive insurance in addition to liability insurance.
2.Motorcycle Experience
First-time bikers will pay higher premiums than veterans. Insurance companies do lower rates for riders who have a lot of experience.
3.Geographical Location
Every state has different insurance regulations and requirements. Motorcyclists who live in urban areas will have to pay higher rates than motorcyclists who live in the country.
4.Age
If you’re an older biker, then you won’t pay significantly high premiums. As a young rider, expect to pay more premiums due to your lack of experience.
5.Driving History
If you’ve had to deal with traffic tickets or previous accidents, your insurance company will bill you more for monthly premiums.
6.Type of Motorcycle
Insurance companies tack on high premiums for those high powered sport motorcycles. Less expensive motorcycles will usually command lower premiums.
Remember, many insurance companies offer a variety of discounts on motorcycle insurance. You can save an amazing amount of money every year if you qualify for discounts. Here are a few common discounts offered by insurance companies:
-In regions where the climate is cold, some insurance companies offer a lay-up policy for the winter. In effect, this is a discount so that you don’t have to pay much insurance during the winter.
-Some companies offer low-mileage discounts for motorcyclists who only ride casually.
-Check with your insurance company about any anti-theft or security discounts. Many insurance companies will offer you a break if you install some sort of security system on your motorcycle.
-Some motorcycle groups and clubs have negotiated group rates with insurance companies. If you’re in a motorcycle group, then ask about these group rates.
-The majority of companies will offer multi-vehicle discounts. So, if you’ve insured a car or another vehicle with the same company, ask about these.
-If you take a motorcycle safety training course, then you can receive some major discounts.
It is a good idea to pay a higher deductible so that you can lower monthly payments. The deductible refers to the amount of money you are required to pay before the insurance company takes over.
You might not realize it, but the average cost of motorcycle insurance can range from between $20 a month to $300 a month. Carefully consider all of your options, and purchase insurance that will completely cover all attributes of your motorcycle.
Hedge Funds Explained
While many investors around the world are looking into hedge funds, very few people actually know the defining characteristics of these funds. Here, we’ll take a close look at the structure and characteristics of hedge funds.
Hedge funds have been around since 1949, when Alfred Winslow Jones set up one of the first funds. Jones built up a private partnership and placed his equity fund under the trusteeship of this partnership.
Jones started by melding leverage and short sales into one fund to create a conservative investment. He believed that choosing the best stocks was a far better option than simply predicting the direction of the market. So, let’s take a look at some of what Jones helped to create.
Corporate Structure
Most US-based financial services companies and managers will build hedge funds as Limited Partnerships. Foreign hedge funds sometimes organize themselves as corporations so they can let in as many investors as they like.
Open Ended or Closed Ended
There are generally two types of hedge funds available; closed-ended and open-ended. In open-ended funds, the fund manager will issue new shares to incoming investors. At that point, the existing investors can issue a call for shares at the current net-asset value, as long as the fund has established redemption policies.
Transparency Not Required
The majority of hedge funds conform to a variety of SEC exemptions that allow them to withhold performance information and earnings. Managers structure hedge funds this way so that they can protect trade secrets.
Performance Fees
The majority of hedge funds will pay their managers around 20% of profits. This means that managers only make money if the hedge fund is successful. If previous losses were incurred, many hedge funds stipulate that a “hurdle” rate of return must occur before the manager is compensated.
Combination of general partner and limited partner
A hedge fund manager will usually contribute quite a bit of his or her own wealth to any hedge fund. Most hedge fund managers, therefore, work as limited partners. However, the job function as hedge fund managers also grants the manager status as general partner.
A High Barrier of Entry
Hedge funds require investors to deposit a sizable amount of assets into the hedge fund in order to take part. The fund manager needs a lot of capital to accomplish his or her objectives.
Chasing After Absolute Return
Good hedge funds will strive to pull in a risk-adjusted absolute return instead of trying to outdo standard market indexes.
A High Degree of Flexibility
Hedge funds have unparalleled access to a wide variety of securities and instruments. Most hedge funds focus on derivatives, which are instruments to mitigate their risk and focus on a market niche by accurately speculating on inherent price complexities.
Since hedge funds utilize a great deal of strategic diversity, they don’t often correlate to equity market standards. This is because hedge funds profit from stock selection, not market performance.
Hedge funds have low liquidity, but this is because their payouts come in large chunks. While hedge funds are generally too expensive for the average investor, some hedge funds have popped up that offer easier qualifications. That’s a basic rundown of hedge funds, so now you know the gist of how they work.
