A couple of thoughts crossed my mind this afternoon regarding travelling, which then led to visions of many Bermudians standing in line waiting to pick up their rental car, SUV or van at some chaotic airport, this being a historically heavy travel time what with Cup Match and all.

Car rental companies want to sell you additional insurance coverage while in a foreign environment (and usually succeed). That led to very, very sad thoughts of the families enduring the losses of loved ones in the aftermath of the Concorde plane that crashed this afternoon. I wondered if many of those who died so tragically carried life insurance. For some survivors, it will ensure financial security into the future, but money will never, ever take away the pain of loss.

These events have a common thread; holidays and families, transportation by car or plane, accompanying these vacation pleasures is always a certain element of risk. Life is to be celebrated and we try to make every day count.

When it is our turn to meet the almighty, we hope we are ready. In the meantime, most of us prefer not to think about these risks, BUT others do! Making recommendations of insurance based upon your family needs is an integral part of a comprehensive financial plan. The primary function of insurance is the creation of the counterpart of risk, which is security. It is an economic device whereby you, the client, substitutes a very small certain cost (the premium) for a large uncertain financial loss (the contingency insured against) that would exist if it were not for the insurance.

Big Business Insurance is big business! A very big business, particularly here in little old Bermuda. Contrary to some opinions, insurance companies are not full of salespeople trying to relieve you of your last dollar. A well-run insurance company with a history of excellent investments and commitment to customer service is providing you, Joe and Mary Public, with great piece of mind. For a price (in many cases, extremely reasonable), the company will contract to insure you and your family against risks of all kinds; travel, auto and collision, theft and loss, destruction of property; natural disasters (hurricanes), death benefits, etc. In fact, some types of insurance companies for the right price and the right odds will insure virtually anything! So, just exactly how do insurance companies makes a profit and pay off on that million dollar life insurance? For this example, we will just stick to the business of insuring people's lives.

You are a 40-year-old male, have a hefty home mortgage (for you anyway), two young children and a mom/spouse working part-time. You worry about their financial health, if something should happen to you. Sound financial planning stipulates that you need to purchase some life insurance, whatever you can afford because your whole family is totally dependent upon you.

So, Mr. Insurance agent fills out your application, with your vital statistics and the form heads into the company for analysis. The wheels start to whirr; enter the statistical experts, those brilliant mathematical minds, Certified Financial Analysts and actuaries, otherwise known as underwriters. These people absolutely love math, rating odds of winning and losing, taking on the risk of insuring you, Joe Public! Did you know because of the sheer volume of insurance business conducted in Bermuda, we have the highest per capita number of CFAs in the world? Underwriters and actuaries have extremely interesting and difficult roles. It is their job to analyse your numbers (you are a number to them) and decide whether to insure you. In your life profile pool group, 1,000 40-year-old males similar to you have decided to buy a $50,000 policy for $300 per year.

Insurance statistical analysis is based upon a number of things; mortality tables, probability and the law of large numbers, administrative costs to the company, amount of reserves to hold for each insured year, rate of return on investments needed to carry the reserves and make a profit, etc.

Mortality tables Let's start with mortality tables. Insurance company actuaries have access to huge amounts of life and death data called mortality statistics, besides creating statistical and financial models of their own. Within the realm of probability, given a large enough number of incidents (now you are referred to as an incident), they know the average number of people who will pass on each anniversary year in your life insurance pool! They don't know if it will be you, but they do know with almost certainty the empirical probability of these numbers. In plain English, that means they have been doing this for a long time, they are experienced.

If you are in a pool of 1,000 males, 40-year-olds in good health, non-smokers, regular exercisers, history of longevity in your family, low incidence of family cancer rates, etc, your numbers may be predicted to decrease in the following manner.

The number of passings may look like this: Three in year 2001, five in year 2002, eight in year 2003 and so on.

They can also predict based upon these rates that they must pay the full policy return of $50,000 to three widows in 2001, five widows in 2002, eight widows in 2003, etc.

These numbers will mean that the insurance company's liability in these future years may look like those passings and would constitute the estimates of the reserves that the company must put aside to cover policy payments for those years. Underwriters may run many, many spreadsheet modules before they arrive at a final number for any year's reserves. And sometimes, no matter how careful, they can be wrong. Does this sound a little like betting? Betting becomes risk backed by careful analysis.

Company reserves accrued might look something like this chart below. Every year, actuaries check the mortality and all other risk factors and revise these numbers: 2001 -- $150,000 2002 -- $250,000 2003 -- $400,000 The rules of the game now become far more complicated. The company has to compute a premium that you can afford, that will keep them competitive and that will allow them to take care of their administrative expenses and make a profit. In a fiercely competitive business climate, the pressure is on to produce a profit on very, very tight margins.

Enter the investment management team strategists. Their job is to achieve a rate of return by investing the premiums you are paying (more risk, these companies love it!) that will help cover unanticipated demand in the reserves, outpace inflation, and cover the widows' total policy payouts each year. The better the investment rate of return, when combined with cost containment in all other areas, the better the overall profit of the company.

Paid in advance And they have one tremendous advantage.

Everything is paid for ahead of time. Think about it, where else does a business get paid in full before they provide a service? Remember they have entered into a contract with you to insure your life and guarantee that they will pay $50,000 to your beneficiaries upon your death. Each year, from your pool of 40-year-olds, the company receives, $300,000 in 2001, $299,100 in 2002, etc.

Keep in mind that your pool is only one of thousands (or millions) that a large insurance company may handle in the course of a year, and that their methods may differ. This is a general concept for us laymen.

Warren Buffett, the great American investor, absolutely loves insurance companies because of the huge amounts of cash that flow into the company on a daily basis, waiting, just waiting to be invested. Large infusions of money, economies of scale, exponential growth, all add up to success.

The downside What happens if there is a catastrophic accident year? And too many of your pool group pass in one year? What happens when an insurance company takes risks (this is really called writing premium) on insuring worker's compensation or natural disasters, such as massive oil spills or hurricanes, or severe flooding. The entire company could be wiped out by having to pay for one underestimated incident. Insurance companies also spread their risks and insure themselves by going to the reinsurers. You guessed it, our re-insurers, Ace, Exel, Partner Re, Select Re, RenaissanceRe (who just announced terrific second quarter 2000 profits) and so many, many more terrific insurance companies all based here in Bermuda are in the business of writing big, big risks.

Insurers, my apologies if this is an oversimplification of a very complex industry.

Stay tuned next week for Part II of Reinsurance for the Rest of US; Reinsurance, The Ultimate Gentlemen's Game.

Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or any other investments, including insurance. Readers needing specific assistance should seek professional advice from their financial advisor.

Martha Myron CPA is a Bermudian, a Comprehensive Financial Planner, a NASD Series 7 licensed investment broker and a US tax practitioner. She is Programming Chair for the Financial Planning Association/Bermuda. Questions regarding this article may be sent to her at 234-0290 or Email: marthamyron y northrock.bm