Final answer:
Liabilities are financial obligations of a company to outside parties, which must be settled via economic benefits. In insurance, these liabilities equate to future policyholder claims; premiums and investment income must cover these claims, expenses, and profits, according to a fundamental insurance law.
Step-by-step explanation:
Liabilities in the context of business are defined as obligations that a company owes to parties outside of itself, which must be settled over time through the transfer of economic benefits including money, goods, or services. For a financial obligation to be considered a liability, certain criteria must be met. Specifically, the obligation must present a present duty or responsibility, arise from past events, and it is expected to result in an outflow of resources embodying economic benefits (e.g., cash, the provision of services, etc.).
In the insurance industry, for instance, these liabilities take on the form of future claims that policyholders will make. Insurance companies must manage their liabilities by ensuring that the premiums collected, along with investment income earned on reserves, are sufficient to cover all claims and related expenses. To sustain profitability and operational viability, the total inflow (premiums and investment income) must surpass the outflow (claims and administrative costs), thereby leaving room for profits. This aligns with a fundamental law of insurance, which states that the average person’s payments into insurance over time have to cover three main aspects: the average person's claims, the costs of running the insurance company, and the net profit margin desired by the firm.