Introduction to Cashflows

Insurance contracts, by its nature, is nothing but about cash redistribution. The contract starts by insurers collecting money (premiums) from policyholders, then distributing them to either back to policyholders (benefit payments), shareholders (dividends), insurance expenditures owners (employees, agencies) or government (taxes). Insurance company itself, ultimately, acts only as an intermediaries, and receive no money at the end. (This make senses, because all residual surplus (i.e.: estate), at the end, should be distributed to shareholders via dividend)

The concept looks simple, but this is something critically important and may help with your understanding when you deal with complex life actuarial models in the future, particularly when reserving is coming into play. It helps you to understand how the profit is finally distributed, reserve releasing as well as how leakage formulae work. Reserving is a complicated thing and confused many junior actuaries.

In the case ignoring investment incomes, an insurance contract is a closed system within the mentioned parties above, hence the conservation of cash flows holds:

∑ Premiums = ∑ Benefits + ∑ Expenses + ∑ Taxes + ∑ Dividends