Risk in Force vs. Insurance in Force

Insurance companies rely on collecting premiums and investing those premiums to stay in business. Claims paid out represent a loss for the business. Because of this, it's helpful for an insurer to understand its risk in force versus its total insurance in force. Understanding these concepts helps an insurer evaluate part of overall stability of the company.

Risk in force represents the total dollar amount of claims the insurer expects to receive during the year. This is based on the actuarial models developed in-house as well as state actuarial models. In the life insurance industry, for example, the Commissioners Standard Ordinary Mortality Tables (CSO Mortality) are predictive of death rates. Knowing the expected claims helps insurers plan their capital reserve requirements adequately.

Insurance in force is the total amount of insurance policies sold and in force. It also refers to the total death benefit or maximum coverage in force, depending on the type of policy involved. In other words, the in-force insurance represents the number of policies that are actively being paid for by policyholders and the total of all coverage the insurer must pay out. Because the death benefit or insurance coverage of these policies will eventually be paid to beneficiaries named on the policy, insurance in force also represents the amount of outstanding liabilities the insurer has. It does not represent all of the insurance company's liabilities, but it generally makes up a substantial percentage of the total liabilities of an insurer.

If the total in force insurance is too low relative to the risk in force, the insurer may not be able to collect enough premium to invest and pay claims as they arise. Alternatively, an insurer must not sell too many insurance policies relative to their potential investment allocation. An insurer that has nowhere to invest premiums also places itself at risk when claims come due.

These two figures alone do not tell the whole story. An insurer relies on its capital reserves and investment positions to predict the company's financial health. The insurance company must retain conservative investments and have enough liquidity to pay claims to maintain financial stability. The insurance in force and the risk in force also do not say anything about the net amount at risk. The net amount at risk is the total amount of money the insurer stands to lose by paying out claims. An insurer may experience a low number of claims in any given year, but the size of those claims may be substantial. This alone may cause severe financial hardship for an insurer.