What Is Policies in Force?
"Policies in force" refers to the total number of active insurance policy contracts that an insurance company has on its books at a given point in time. These are policies for which coverage is active, and for which the policyholder is typically paying premium or has fulfilled their premium obligations. This metric is a fundamental component of insurance metrics, reflecting the volume of an insurer's active business and its ongoing obligations. It provides insight into an insurer's market penetration, operational scale, and the aggregate level of risk management it is providing.
History and Origin
The concept of tracking "policies in force" emerged naturally with the growth and formalization of the insurance industry. As insurance evolved from informal mutual aid societies to structured commercial enterprises, particularly in the 17th and 18th centuries, companies needed a way to quantify their active business. Early forms of insurance, such as maritime and fire coverage, laid the groundwork for modern practices. The formalization of data collection and statistical methods, including the development of actuarial science, became crucial for managing risk and setting appropriate premiums.
In the United States, the need for standardized reporting and oversight led to the formation of regulatory bodies. The National Association of Insurance Commissioners (NAIC) was established in 1871 by state insurance regulators to coordinate oversight across state lines and standardize financial reporting for insurance companies. This historical emphasis on consistent financial data underpinned the importance of metrics like policies in force for regulatory and business analysis.25, 26, 27
Key Takeaways
- Volume Indicator: Policies in force represents the sheer volume of active insurance contracts held by an insurer.
- Revenue Potential: It indicates the recurring revenue stream from ongoing premiums, though not the specific amount.
- Future Liabilities: Each policy in force represents a potential future liability (e.g., claims payout) for the insurer.
- Market Share Insight: Growth in policies in force often correlates with increasing market share and customer acquisition.
- Operational Scale: The number of policies directly influences an insurer's operational demands, including customer service, billing, and claims processing.
Interpreting Policies in Force
Interpreting "policies in force" goes beyond simply counting the number of contracts. For an insurer, this figure is a critical indicator of its business momentum, customer retention, and the scale of its current obligations. A consistently growing number of policies in force typically signifies successful underwriting, effective sales strategies, and strong customer loyalty.
However, the raw number needs to be contextualized. For instance, a large number of life insurance policies in force might suggest long-term, stable revenue potential due to the extended nature of these contracts. Conversely, a high volume of property and casualty insurance policies might imply more frequent, albeit often smaller, claims payouts. Analysts often look at the trends in policies in force over time, alongside other metrics like premium growth and policy lapse rates, to gauge the health and efficiency of an insurer's operations. The quality of these policies, in terms of profitability and risk exposure, is often more important than the quantity alone.
Hypothetical Example
Consider "Horizon Insurance Co.", an imaginary insurer specializing in auto and home insurance.
At the end of Year 1, Horizon Insurance Co. reported 500,000 auto policies in force and 200,000 home policies in force. This means that 700,000 active insurance contracts were generating premium income for the company.
During Year 2, Horizon adds 100,000 new auto policies and 30,000 new home policies. However, 50,000 auto policies and 10,000 home policies lapse (are canceled or expire without renewal).
To calculate the policies in force at the end of Year 2:
- Auto Policies in Force (Year 2): 500,000 (beginning) + 100,000 (new) - 50,000 (lapsed) = 550,000 policies
- Home Policies in Force (Year 2): 200,000 (beginning) + 30,000 (new) - 10,000 (lapsed) = 220,000 policies
Thus, at the end of Year 2, Horizon Insurance Co. has a total of 770,000 policies in force. This demonstrates a net increase of 70,000 policies, indicating business expansion despite some customer turnover. This metric would be a key figure for management when assessing growth and setting future sales targets or examining churn.
Practical Applications
Policies in force is a fundamental metric used across various facets of the insurance industry:
- Financial Reporting and Analysis: Insurers report policies in force as part of their regular financial statements, often in annual reports. Analysts use this data to assess the company's growth trajectory and underlying business volume. For example, global insurance premiums have seen significant increases, reflecting, in part, the growing number of policies worldwide.24
- Strategic Planning: Management uses policies in force data to inform strategic decisions regarding market expansion, product development, and resource allocation for sales and servicing teams. A robust and growing base of policies in force can enhance an insurer's negotiation power with reinsurance providers.
- Regulatory Oversight: Regulators monitor policies in force as part of their assessment of an insurer's scale and potential systemic importance. This data, alongside capital and reserve levels, helps ensure insurer solvency and ability to meet future obligations.
- Valuation and Mergers & Acquisitions: In the context of mergers and acquisitions, the number and quality of policies in force are critical factors in valuing an insurance company. A large, profitable block of policies represents a valuable asset base.
- Revenue Recognition and Accounting: Under accounting standards like IFRS 17, the recognition of revenue for insurance contracts is directly tied to the active policies and their associated future cash flows, influencing how premiums contribute to an insurer's reported earnings.19, 20, 21, 22, 23
Limitations and Criticisms
While policies in force is a crucial metric, it has limitations. The raw number does not convey the quality or profitability of the business. A company could have a high number of policies but low profitability if those policies are poorly underwritten, carry high claims rates, or are priced inadequately. Similarly, a high volume of policies with low average premiums might generate less overall revenue than a smaller number of high-value policies.
Another criticism is that the metric can mask underlying issues such as high policy lapse rates or a concentration of policies in high-risk segments. A large number of policies might also lead to increased operational costs for servicing and administration, potentially eroding profit margins if not managed efficiently. Furthermore, external factors such as economic downturns, natural disasters, or shifts in consumer behavior can significantly impact policy retention and the influx of new business, affecting the stability of the policies in force figure. Regulators and financial stability bodies increasingly scrutinize the resilience of insurance portfolios to various risks, underscoring the need to look beyond mere policy counts.16, 17, 18
Policies in Force vs. Sum Assured
"Policies in force" refers to the total count of active insurance contracts, providing a measure of the volume of an insurer's business. It is a numerical quantity, irrespective of the financial value of each contract. For example, an insurer might have 1 million auto policies in force, regardless of whether each policy covers a $20,000 car or a $50,000 car.
In contrast, "sum assured" (or "face amount" for life insurance) represents the total amount of money that an insurer has contractually agreed to pay out under its active policies if a covered event occurs. This metric quantifies the insurer's total potential financial exposure or its maximum payout obligation across all its active policies. Therefore, while policies in force indicates the number of active contracts, sum assured reflects the aggregate financial exposure or benefit value of those contracts. An insurer might have a relatively low number of portfolio management life insurance policies in force but a very high total sum assured if those policies are large, high-value contracts. Both metrics are vital for assessing an insurer's scale and risk, but they offer distinct perspectives on its business.
FAQs
Q1: How do policies in force impact an insurance company's balance sheet?
A1: Policies in force indirectly affect the balance sheet by representing future premium revenue (an asset) and potential future claims obligations (a liability). The accounting treatment of these items, including unearned premiums and reserves for future policy benefits, is directly linked to the existence of policies in force.
Q2: Does "policies in force" include policies that are not currently paying premiums?
A2: Generally, "policies in force" includes any policy for which the coverage is active. This typically means premiums are being paid, but it can also include policies that are "paid-up" (e.g., certain life insurance policies where all premiums have been paid but coverage continues) or policies under grace periods.
Q3: Why is tracking policies in force important for investors?
A3: For investors, policies in force helps assess an insurer's growth, market share, and potential for future earnings. A rising number of policies often signals a healthy business gaining traction, though it should be analyzed in conjunction with premium growth and profitability to get a complete picture of the company's financial health and stability.
Q4: How do regulators use policies in force data?
A4: Regulators use policies in force to monitor the overall scale of an insurer's operations, assess its market concentration, and evaluate its adherence to capital requirements. This data helps ensure that insurers maintain sufficient financial resources to meet their obligations to policyholders.
Q5: What factors can cause policies in force to decrease?
A5: Policies in force can decrease due to several factors, including policy lapses (non-payment of premiums or voluntary cancellations), policy expirations that are not renewed, policy surrenders (especially common in life insurance), and a lower rate of new business acquisition compared to policy attrition. Economic downturns or increased competition can exacerbate these factors.1, 2, 3, 4, 56, 7, 8, 9, 1011, 121314, 15