How an insurer works

An insurer sells a promise. A customer pays a known, small amount now, the premium; in return the insurer pays for an uncertain, possibly large loss later, if it happens. Harbour Mutual's customers pay to be protected from a crashed car, a burgled flat or a hospital bill on holiday.

Pooling risk

No one knows whether their house will burn down this year, but an insurer with thousands of houses can predict, fairly closely, how many will. That is the law of large numbers: the more independent risks are pooled, the more the total cost settles around its average. The insurer charges each customer a share of that expected total, so the few who suffer a loss are paid from the premiums of the many who do not.

Where the money goes

A premium has to cover three things, and leave a margin:

• Claims: what is paid out for losses. By far the largest part.
• Expenses: running the company, and acquiring the business, such as the commission paid to brokers.
• Capital and profit: regulators require insurers to hold capital against bad years (in the EU under Solvency II), and that capital expects a return.

Money in now, money out later

Premiums arrive at the start of cover, while claims are paid months or, for injuries, years later. In between the insurer holds and invests the money (the float), and it must set aside reserves for what it still owes. This timing is why insurance data is full of dates: when cover started, when a loss happened, when it was reported, when it was paid.

Harbour Mutual in numbers

The analyst's job is to turn those rows into answers: which products make money, where claims come from, which customers stay. That is what the ten days build up to.