4 FINANCIAL ATTRIBUTES HOW A COMPENSATION SYSTEM IS FINANCED I....
2.2.4 Financial Attributes
How a compensation system is financed i.e., its sources of revenue, is key to understanding its inherent
viability over the longer term. In private insurance systems, principal sources of finance include
earnings from premiums, reinsurance coverage and interest from accumulating capital reserves. In
systems with a public element there are frequently financial transfers from the government, as either
direct compensation payments, or as an indirect subsidy in the form of a state guarantee for flood
losses above a particular level.
Insurance premiums can be set by insurers, the government or by an agreement between both.
Insurance companies can be incentivised to accumulate sufficient capital reserves through favourable
tax arrangements. The calculation of insurance premiums also vary. They can be set at actuarially
correct levels, which are termed risk-based premiums or they can be set at a fixed level which likely
involves some form of cross subsidisation from low risk to high risk policyholders.
Another financial attribute to take into consideration is whether or not direct and indirect flood damages
(such as loss of business days) are covered by an insurance system, the limits to maximum coverage,
and the extent to which underwriting tools such as deductibles
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