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An insurance income statement is a document recording all of the profits and losses incurred by an insurance company, which results in the company's net income for the year. As is the case with other companies, the net income for an insurance company is calculated by subtracting expenses from revenue. Since there are no physical products made by an insurance company, revenue and expenses are incurred in a different manner from product-selling companies. Typically, an insurance income statement will include documentation on the premium paid by customers for insurance policies and on the losses incurred by the company when accidents occur and customers must be paid damages.
The insurance industry serves a crucial purpose in society, providing a financial safety net for people who have had some sort of calamity befall them. It is important to understand that insurance companies are also attempting to make profits for their owners and shareholders. They must measure the financial risks involved with each and every customer and tailor their premiums to those risks. An insurance income statement shows if the insurance company in question is maintaining these risks and producing a profit.
All income statements have a basic format that is mirrored by an insurance income statement. At the top of the income statement is a total of the revenue earned by the company in a single year. Below that are the company's expenses, which are incurred in the process of earning revenue. Revenue minus expenses, which also include taxes and interest owed, equals net income, which is the total profit the company has earned for the year.
In terms of an insurance income statement, revenue is measured by the premiums an insurance company takes in each year. The premiums are paid by the customers in return for the risks incurred by the insurance company offering the profits. Net premiums for the year are compiled once ceded premiums, which are the premiums paid by the insurance company to buy reinsurance, are considered.
Expenses in an insurance income statement are usually the product of a company paying out claims to policy-holders. Insurance companies also put a certain amount of money in reserve just in case they need to pay out claims, and this money in reserve is also an expense. In addition, expenses are incurred each time an agent of the company earns a commission for selling a policy. All of these expenses are subtracted from the net premiums earned to arrive at an insurance company's net income.