The Last Contributing Factor To The Success Of Car Insurance

1346 WordsFeb 28, 20176 Pages
The last contributing factor to the success of car insurance companies is their risk management in making investments. In fact, in 2012, insurance companies had $5.4 trillion in investment assets (Rocca). As previously stated, car insurance companies have only two sources of income: premiums generated by customers and the capital gain from investing those premiums (Hussain). In fact, without gains from investments, many car insurance companies would go out of business. Therefore, it is absolutely essential that these companies are able to invest well to stay afloat. And their investment in these assets is all a big game of risk management. The first asset that car insurance companies heavily invest in is bonds. A bond is a debt…show more content…
And if they do lose all of their revenue in bonds, they know that they could go bankrupt. Therefore, auto insurance companies’ risk management in and by investing in bonds is pivotal to their success. Another asset that is essential to the success of auto insurance companies is first-lien mortgages, which insurance companies had $351 billion worth of in 2012 (Rocca). Basically, a first-lien mortgage is a mortgage loan that auto insurance companies give to other entities and charge interest. In the event of a default, the first-lien holders are paid first before all other debt holders (“First”). The reason why car insurance companies like this is because they know that if those they loan mortgages to default, then they will be that the first priority to be paid back of those who they loan to. Therefore, first-lien mortgages present much less risk than other types of mortgages or second mortgages, where the loader a second on the priority list (“First”). Car insurance companies will also use another technique to manage their financial risk in loans called collateralization. Collateralization is the idea that when the client of a loner defaults on their mortgage, they have to give their home back to the loaner to pay off the rest of the loan (Pritchard). Auto insurance companies can use this technique to insure that their loans are financially secure and therefore

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